Sunday, September 02, 2012

This is the first of a six-part series introducing readers of The Christian Science Monitor to concepts useful in understanding the Resource Insights blog. Selected posts from Resource Insights will begin to appear on the Monitor's Energy Voices blog starting this month.

What were the prices of oil and gasoline in 1998? Do you remember? Without looking them up (or looking below this line), make your best guess.

I've been taking an informal poll to find out what people remember about oil and gasoline prices in that year. So far, only one person has correctly characterized prices back then. Most guesses have clustered around $2.50 to $3 a gallon for gasoline (in the United States). Only one person could come up with a crude oil price which she guessed was around $55 a barrel. The answers show a vague recollection that oil and gasoline were cheaper than they are today. But just how much cheaper has been lost down the memory hole.

Perhaps the best example of the oil industry's "Wrong Way Corrigans" is industry mouthpiece Daniel Yergin, head of Cambridge Energy Research Associates (CERA), a prominent energy consulting firm. For a long time Yergin has been a frequent guest on prominent television news programs and a source for many print journalists. He is a darling of the media on energy issues, a media which is too polite to confront him with his abysmal record of predictions in the oil market. He was wrong in his public pronouncements every step of the way from the 1998 low in oil prices right up to the all-time highs of 2008, frequently predicting a large buildup of new supply and crashing prices. (One wonders why clients of CERA continue to buy the company's research when it has been so wrong for so long. But that's a story for another time.) Only at the end of 2008 did oil prices finally crash and then only because the world economy was headed into the worst economic decline since the Great Depression. But as soon as the economy revived even tepidly, prices rose back to $80 a barrel and then above $100 which is about where they are today.

Oil production has stalled despite the huge incentive that record high prices are providing for oil exploration and development. And, despite enormous spending by oil companies on exploration and drilling worldwide, we have only just kept production on a plateau for the last seven years. These high prices and enormous capital spending were the reasons given by Daniel Yergin for the expected buildup of production volumes. So what went wrong?

The simple answer is that we've exhausted the easy-to-get oil and are now left with mostly the hard-to-get oil. It only makes sense that the early oil pioneers harvested the easy oil first. Why go after the hard stuff at that point? We've since learned how to extract oil that is much harder to develop. This includes deposits far offshore and deep below the seabed as well as those locked in the Canadian Tar Sands, deposits that must undergo expensive and energy-intensive processing to convert what is really bitumen, a goopy, thick hydrocarbon, into what we call oil.

And, this leads me to a crucial concept which I find myself repeating over and over again in response to all the foolish Daniel Yergins of the world: The critical factor in the oil markets and a global economy dependent on large, continuous supplies of oil is the rate of production. The rate is the key, not the size of the world's reserves. It is the size of the tap, not the size of the tank that matters.

Let me offer another analogy to help explain. If you inherit a million dollars with the stipulation that you can only withdraw $500 a month, you may be a millionaire, but you will never live like one. That is increasingly the situation we face with oil. There may be huge resources of tight oil (often mistakenly referred to as shale oil) and of oil-like substances such as tar sands. But the expense, the necessary energy and increasingly, the amount of water required to extract and process them is so great that we have been unable to lift the worldwide rate of production significantly above its current plateau for a sustained period during the last seven years. Even with all our vaunted new technology, we have only just barely been able to replace the capacity lost each year to the inexorable decline in the rate of production from existing oil fields.

The truth is we won't know for sure that we've passed the peak in world oil production until long after it occurs. It may be a decade after the event before oil production turns down definitively and the peak becomes obvious for all to see.

Just to clarify, here's what peak oil does NOT mean:

Peak oil does not mean we are running out of oil. This is a canard used by the oil industry to confuse the public. Nobody who understands world peak oil production ever says that it means we are running out. In fact, we won't run out of oil for a very, very long time. At the peak the rate of production will cease to rise, probably trace a plateau for a time, and finally begin a possibly slow and bumpy decline. That means we'll have less and less oil available each year. As oil becomes more and more expensive, we will use less, and we will ultimately reserve it for critical purposes for which we cannot find good oil substitutes.

Peak oil does not mean that we won't find any more oil. We are finding oil every day. We're just not finding enough and putting it into production fast enough to grow production in the face of declining flows from existing fields.

Peak oil does not mean the immediate collapse of modern civilization. However, if we stand still and do little to address oil depletion, peak oil will likely result in immense difficulties.

The industry and its paid spokespersons try to dazzle the public with talking points that include the notion that we have more oil reserves than we've ever had. That is questionable, and I'll explore that claim in a later piece. But again, I emphasize that reserves are not the salient point. It is and always will be the rate of production that matters more. If oil production stopped for a sufficiently long period--enough to drain all aboveground supplies--modern civilization as we know it would collapse. The amount of reserves would not matter since the rate of production would have dropped to zero.

What matters is how much we can produce for continuous input into the world economy. As you might intuit, we've built a financial system and physical infrastructure premised on continuous and rising levels of oil consumption. That's why peak oil matters so much, and why flat oil production has been a large contributing factor to the unstable world economy in recent years.

Perhaps it will seem puzzling that experts inside the industry--with a few notable exceptions--cannot grasp that the rate of production is the central issue. The best explanation I can offer is to quote author Upton Sinclair: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

And, here is where we get to the motivations behind the sunny optimism of the oil industry. If the public understood that oil supplies might be nearing an irreversible decline, it would demand the deployment of alternative fuels and efficiency measures to soften the blow in order to give us time for a transition to a society based on something other than oil. That would ultimately reduce demand for oil products and eventually end our dependence on oil. Oil companies might get stuck with significant inventories in the ground that they cannot sell, at least not at the prices or in the quantities they would like.

The more immediate problem for oil company executives is that their companies may soon find it impossible to replace all their oil reserves. Oil companies strive to replace at least 100 percent of what they produce so that their reserves don't fall. If investors come to believe that a failure to replace reserves will be ongoing year after year, they will mark down oil company share prices significantly. In fact, it's already happened, and it's likely to happen with more frequency as more companies struggle to reach 100 percent replacement. Such share price declines would, of course, make a lot of oil executives significantly poorer as the value of their stock and stock options plummet. Essentially, oil companies would be recognized as self-liquidating businesses.

All of this the oil industry wants you to ignore as it undertakes yet another public relations campaign to convince the world that supplies will only grow from here. Naturally, with prices near $100 a barrel, the public needs reassurance. The campaign is designed to lull both the public and policymakers into a somnolent surrender to a business-as-usual future that will leave us unprepared for the momentous challenges ahead.

No one can know exactly when world oil production will peak--not me, not the world's oil companies, not any government agency. The dangers we face if we are unprepared are potentially quite severe. With worldwide oil production essentially flat for the last seven years, the sensible thing to do would be to get ready now as quickly as we can.

Given what's at stake for oil company managements, it should be obvious why they are telling us not to worry. Given the publicly available production data, the persistently high price of oil, and the failure of oil companies to expand worldwide production even after enormous expenditures and effort, it should also be obvious why we shouldn't fall for the industry's beguiling but wildly misleading tale.

Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.

6 comments:

Smokin' Joe
said...

I don't think you have enough information to write an article like this. There is a lot of not so hard to get oil in Alaska. Are you aware of the Katalla, Bethel, Kachemak Bay, Bristol Bay, ANWR, Barrow, near Prudhoe and other huge reserves in Alaska alone? It's there and it's been kept quite a secret. Also HUGE natural gas reserves.

I am aware of those places. But you are falling into the trap of equating "resources" with "reserves" and equating both with production.

But I will reiterate that the rate of production is the issue. Possible oil development is not reserves as you suggest. Reserves are what the drillbit shows is actually there. And even reserves are not the same as production.

I don't disagree that we have large "resources" of oil and oil-like substances. But resources are merely what's in the ground, not what we can extract economically. What the data show is that we have been unable to turn our resources into reserves and then into production fast enough to raise the rate of production for seven years.

You mention natural gas reserves. Again, you may be confusing resources and reserves. I don't doubt that there is a lot of natural gas around, but, of course, my piece is about oil, not natural gas.

Thanks for giving my piece a second read just to make sure. Most commenters don't bother. For those who are making their way down these comments, here's what I wrote:

"So, here's another question to ponder: How long does one billion barrels of oil last the world at current rates of consumption? If you guessed something close to 12 days, you have a sense of the enormous challenges humans face in extracting finite resources at ever higher rates. Just multiply those multi-billion barrel discoveries by 12 to find out how many days the oil age might be extended by each discovery. You'll find the answer is, 'not many.'"

By the way, the worldwide rate of production for crude oil including lease condensate (which is the definition of oil) in May, the last month for which figures are available, is 75.3 million barrels per day.

You may be thinking of the number for total liquids which include natural gas plant liquids, biofuels and some other minor components as well as crude oil and lease condensate. That number was 88.8 million barrels per day in May. These other liquid fuels are important, but only a small portion of them can be used as direct substitutes for oil.

What should be "pounded" in the US context probably is :- The US passed its oil production peak in 1971- The label "Arab oil embargo" attached to the first oil shock (together with an "OPEC agressive move") is nothing but public opinion (US in particular) management, the fundamental reason for the first oil shock --is-- the 1971 US PRODUCTION PEAK, and US diplomacy and the majors PUSHED FOR the price rise and OPEC quotas, necessary in particular to start Alaska, GOM, North Sea

Note : of course in parallel (or a bit before) there was the "rebalance" of oil production benefits between the majors and production countries, but one could understand that this had to happened anyway, and doesn't change the fact that the price rise (and OPEC quotas) especially post US peak, was a win win situation between the majors and OPEC or let's say common strategy interests.

Note : great documentary about above "la face cachée du pétrole" with James Akins interviews in particular (James Akins was the guy named by Nixon for auditing US production capacity further to 1971 peak, and was then US Ambassador to Saudi Arabia)